Tuesday, June 15, 2021

Not Even A Fig Leaf For The Fed

 To justify the continued torrent of fresh cash monthly via QE, the Fed and its happy Wall Street chorus of “economists” keep harping on the lower than expected number of monthly payroll additions. That’s disingenuous, to say the least.

Why? Because the number of job openings, ie jobs that go wanting because employers cannot find people willing to fill them, is now at at an all time record high, and equal to the total number of unemployed Americans (chart below).


The only time this has happened before in 20 years (when job openings data started being compiled) was in 2018-19, when the economy was, of course, very robust and the Fed had started to raise interest rates. Fed funds were raised from 0.4% to 2.4% (now at 0.05%) and the 10-year treasury was at 3.2% (now at 1.50%).

Does the Fed have no shame hiding behind the payroll numbers fig leaf? Well, no, because there isn’t even that, as we see above: every single unemployed American can have a job, immediately.

I don’t  believe the Fed is clueless or incompetent - obviously not. I’m even willing to accept (hope) that it’s not in the  politicians’ back pockets, doing their bidding to carry favor.

Which, then, begs this question: does the Fed know something that we don’t, maybe about the coronavirus? Because I fail to see anything in today’s red hot economy to justify its current inflation-objector stance. 





Monday, June 14, 2021

Inflation And Bonds

Those of us who lived through double digit inflation may easily dismiss 2% or 3% annual price increases as benign - and for as long as our money earns interest at or slightly above, that's OK.  At least we are not losing purchasing power.  Here is a chart, a reminder of what various levels of inflation does to $100 over the years.

I deliberately chose 30 years as the ending point because bonds and other such fixed income investments are heavily bought by pension funds who, by definition, have very long term investment horizons.  

Our Fed claims that CPI inflation, currently running at 5% annualized, well above the yield of 30 year treasury bonds (currently at 2.19%) and way higher than Fed Funds (essentially 0%), is just transitory.

On the chart below you can see that until now bond yields were always higher than inflation, and so were Fed Funds, for the most part.  That's what you call monetary rationality. Today, we are off the charts on loony money policy, however.


And why is the market not "killing" bond prices, driving yields higher?  Because (a) the Fed is constantly in the market buying bonds, thus supporting prices at unreasonably high levels and (b) ultra low short term rates encourage banks/traders to play the "carry" game by borrowing at near 0% and holding bonds that pay 2.19%.  That's at least 2% profit free and clear - with high market risk, of course, should bond prices drop.

But what about those pension funds, the buy and hold long term investors?  They are in a bind: what kind of pensions are they going to be giving out in the future?  As things stand right now, at minus 2.7% their $100 investment in bonds will be worth a mere $40 in real terms after 30 years !! A really terrible deal for their pensioners, criminal almost.

So, unless the Fed is 100% correct and inflation drops back to 2% or less very, very soon why would ANY pension fund want to buy and hold bonds? And, remember, they are by far the largest and most solid, real money investors in bonds - and that includes the Social Security pension scheme.

Friday, June 11, 2021

This Time It's Worse - Much Worse

In my last post I laughed at the notion that "This time it's different" when it came to money creation, inflation and asset bubbles.  

Well, I was wrong - because this time IS different: it's much worse.

There has never been a time in History when the world's major central banks/monetary authorities were so astoundingly "loose" (to use a polite term), creating a bubble so far reaching across all asset classes and with the participation of all social and age groups.  It is no longer a mere bubble, but a bona fide mania stoked by the power of social media. Which, in turn, are most certainly and obviously being exploited by those who have most to gain by this PsychoBubble - the scammers, pump-and-dumpers, carnival barkers.  Not to mention the legitimate brokers, investment bankers and asset managers who are raking in hundreds of billions in commissions and fees.

Here is what is worst, this time: the printing of trillions of US dollars and EU euros is undermining their future as reserve currencies.  So far we have not seen any major currency devaluation because they cancel each other out, ie there is no other major global currency out there to compete with them. So far..

Because China and its yuan are lurking and preparing to pounce.

It is certain that China wishes to become the next global superpower, supplanting the US (the EU is not a superpower, it's an agglomeration of separate economic interests that try to steer a common direction, mostly failing).  It was the world's first real global economic superpower, it invented paper currency and the first weapon of mass destruction (gunpowder).  It even invented a central bureaucracy (mandarins).  So, it has the historical/social background and understands its context.  Furthermore, excluding the loony Mao era, China has always been a truly capitalist, mercantilistic society driven by the quest for profit. 

Where is China today? It is the world's largest economy in Purchasing Power Parity terms (PPP) and second in absolute GDP.  Its GDP has grown astonishingly fast, from less than 10% of US GDP in 2001 to over 70% today. At the same time its share of global GDP has gone from 2% to 18%.


China GDP 

 China GDP - Billion USD

 Let's get this straight: China can no longer afford NOT to issue and maintain a global reserve currency.  It cannot stay competitive without one, it cannot control, purchase, manufacture and market raw materials, products and services around the world without making the yuan a global reserve currency, starting with removing all trading restrictions, while - like the US and EU, after all - maintaining a strict control over its monetary policy.

Obviously, it needs to do so, and soon because its economy is simply too large to continue prospering without a reserve currency. There is absolutely no question in my mind that it also wants to do so, strategically.  

Two questions remain: a) can it do it? and, b) how will it do it?

a) Can it do it? Yes, of course. Being the world's largest exporter of just about everything the rest of the world buys, it has a ready-made existing demand for its currency. All it has to do is to invoice in yuan instead of USD or EUR.  Likewise, it is an importer of enormous quantities of raw material and luxury goods, so trade balances can be "square" with many of its trading partners, if not with the US (that's America's and the dollar's obvious Achille's heel).

b) How will it do it? In a word, carefully but most likely suddenly when conditions are right. In fact, it is already carefully preparing to do it.  Since 2005 China abandoned its fixed exchange rate policy and sharply revalued yuan from 8.3 to 6.3 per dollar. Very tellingly, the yuan has appreciated  strongly since 2020, ie in the midst of the largest ever USD printing in history, going from 7.2 to 6.4 per USD.

Yuan (CNY) vs USD

Unlike the Fed/ECB which maintain very negative real interest rates, PBoC's benchmark one year loan rate has been stable at 3.85% for over a year. Given China's inflation of 2.5%, real rates for CNY are currently well above those of USD and EUR.  In other words, it pays to hold CNY instead of USD or EUR - and that's one of the major requirements of a global reserve currency.

China Loan Prime Rate 

 PBoC Benchmark 1-Year Loan Rate

Back to how/when? Clearly, Chinese authorities must be worrying about the ultimate value of their massive US Treasury holdings.  Their exporters are selling enormous amounts of real goods to US and EU customers, only to receive (mostly) IOUs denominated in currencies that pay zero or even negative rates. How long can this continue? How long will China continue to, in essence, subsidize American and European consumers and governments? And, adding insult to injury, America in particular wants to impose trade restrictions, import duties, etc. 

China's leadership may have viewed Trump as a loony outlier and waited him out, but it certainly cannot do so with Mr. Establishment Biden. Unfortunately, Mr. Biden is even more aggressive in deeds, if not in words, against China.  His trillions in new "liquidity", his plans for even more in the next few years and his Treasury/Fed's stubborn insistence on huge QE at zero interest rates must have Chinese leaders seriously concerned about the dollar's viability. Add that to being blamed (rightly or wrongly) for the COVID pandemic and the mix is getting highly toxic.

Bottom line: China could decide to pull the trigger at any time.  Yes, an Empire desires global stability above all else.  But first, it must rise to the top by toppling the previous one.  The US is currently asking for trouble by sticking to an incredibly irresponsible fiscal and monetary policy, well after the COVID emergency has passed. 

So, this time around the Bubble is much worse because it comes with a very real possibility that its mishandling will end up in the Sudden Death of the American Empire. 

One last note and chart.  The Fed’s overnight reverse repo reached a record $535 billion yesterday, thus removing almost 5 month’s worth of QE (currently at $120 billion/month).  In this reverse repo banks lend money to the Fed for 1-3 days (weekends are Fri-Sun) at a set 0% in exchange for Treasury Bill/Note collateral.  


Banks currently have more money than they can - or choose to - profitably use elsewhere.. Where is such short term money usually lent to? The commonest and biggest user is the securities’ margin market, which trades on a “call” basis, ie it is due immediately on demand.  The current call rate is 2%, though very large brokers/borrowers may pay less.  

For that $535 billion, therefore, banks miss $10.7 billion in annualized interest income by doing a reverse repo with the Fed at 0%.  That’s a lot of money to miss from their bottom lines, either because they have to (no borrowers) or because they choose to (risk aversion). Either way, the signal this is sending out is important - and it’s not about some temporary liquidity “imbalance”. 

Thursday, June 10, 2021

Inflation? Naaah.. This Time It’s Different, No?

 One chart today.  Core CPI inflation (monthly, annualized - blue line) and the effective Fed funds rate.(red line).


For decades the Fed mostly kept its interest rates higher than or in line with inflation, since price stability (ie safeguarding the value of the US dollar)  was its primary mission. The red line was almost always above the blue line.

All that changed when the Great Debt Bubble burst and the Fed/Treasury stepped in to save the banks, brokers, and the US credit-dependent economy from collapse.  Things were so bad that the Fed had to keep rates at zero for a long time (yellow circle).  (Aside: 99% of the people still think this was due to the US sub prime mortgages only… false: it was a global Debt/Asset Bubble in everything: mortgages, corporates, sovereigns, real estate, stocks, derivatives, insurance, credit ratings... it was a huge mess.  And, in fact, it hasn't really gone away.}

So, when the COVID crisis hit what did the Fed/Treasury do? More of the same, but this time ALOT more.  The global economy is now so completely awash with dollars and euros that they are channeled to ridiculous “assets” like NFT “art”, meme stocks, dubious cryptos and all kinds of commodities. Naturally, inflation has surged to 40-year highs. For the time being, anyway. 

What is the Fed’s exit strategy from unprecedented QE? It is best described as a wish and a prayer: they wish inflation goes away soon, and pray to Modern Monetary Theory that it does so.

And this is the best short description for MMT: Inflation? Naaaahhhhh… this time it’s different.

Curiously, there is another country and its leader who, broadly speaking, think (wish, pray) along the same voodoo monetary policy lines. Turkey’s Mr. Erdogan believes that low interest rates reduce inflation(!!). Results so far? Inflation is over 20% and the Turkish lira has lost 30% against the dollar in just one year.  Aaahhh … but the US isn’t Turkey.  IS IT? No it isn't - unless and until China makes a move and wipes out the US dollar in one fell swoop.

More on China, the yuan/dollar situation and history's lessons in another post.

Wednesday, June 9, 2021

Unemployment… Seriously?

 The Fed continues to claim that the torrent of cash it creates each month ($120 billion) is necessary because the economy is still … dunno… weak?? Seriously?

 I mean, look at the current all time record in job openings.  They just hit 9.3 million (versus 8.8 million officially unemployed) because people are, basically, dis-incentivized from going to work.  Current unemployment benefits easily cover, or even exceed, take home pay in many sectors such as restaurants, hotels, entertainment, etc. Guess what else is going on: people are also working off the books AND receiving unemployment, ie double dipping at 5he Fed/Treasury punch bowl.

Doesn’t Anyone Want To Work Anymore?

So, I’m going to completely ignore what Mr. Powell (a lawyer by education) is saying and listen to Mr. Buffett, instead: “The US economy is red hot” Obviously, he knows better. 

Why is Mr. Powell still printing? Because he is simply not an independent Fed Chairman, having cast his lot with the DC populist politicians, regardless of party.  Right now, Republicans and Democrats both are buying votes by printing dollars.  The cost will come later, but I’m betting not so much later as they think..

Tuesday, June 8, 2021

Random Thoughts

 On the Fed/Treasury money torrent:

1.  Ms. Yelled just said that higher interest rates may be a good thing.

2.  The Fed reverse overnight repo is at approx. $485 billion. So, with one hand the Fed is adding $120 billion per month “permanently” and with the other it is removing 4 months’ worth “temporarily”. An untenable situation, obviously.

==> Conclusion, IMHO? The tapering process has started, even if with the tiniest baby steps.

On Cryptos:

1. The US government identified the digital wallet  used for the pipeline Bitcoin ransom payment, reached in and got most of it back. Doesn’t look too “crypto” to me, eh?

2. El Salvador wants to make Bitcoin legal tender. El Salvador, not, say, Japan…

==> Conclusion, IMHO? The crypto insanity mania is over, from now on only fundamentals will rule their prices.  Most of them (like 99%) will become worthless.

On financial markets:

Deutsche Bank just came out with a scathing critique of printing money, predicting inflation will not be a passing phenomenon and will cause the Fed/ECB to raise rates sharply later, leading to a deep recession. Deutsche is very much going against Wall Street conventional wisdom which, predictably enough, wants the party to keep going.  

==> Conclusion: Deutsche joins a growing list of heavy hitters such as Dalio, Kravis, Grantham, Summers, Druckenmiller and Gross.  Who’s on the other side? Goldman and millions of froth in the mouth Reddit “investors” who plunge into (basically worthless) meme stocks and cryptos.  Oh, fun… (not!).





Friday, June 4, 2021

This Is Beyond Nuts

Forget everything you know about bubbles, delusions and manias. Today’s “free markets” (forgive me Adam Smith) are psychotic, at the very least. They are no longer economic, social or even psychological mechanisms or phenomena, but case studies in clinical neuropsychiatry. Case in point: DubaiCoin (chart below). Within just four (4) days from May 26-29 it went from $0.08 to $1.80 and back to $0.20. That’s a gain of 2,250%, followed by a drop of 84%, all in four days. And as of this posting it is at $0.30, a subsequent gain of 50%.

Heavy Meds Needed, STAT!!

Yet, that’s almost rational when compared to the invisible sculpture that was auctioned for 15,000 euro last month.  That’s right, invisible as in empty space, thin air, niente, nada, nothing.  It even comes with instructions on how it should be properly displayed. I’m not kidding, read and laugh - or weep.


Money For Nothing- Literally

I said that there’s too much money around chasing all kinds of “stuff”.  Now, money is even chasing nothing and is used to price nothing. Ergo, what is the value of money? Yup, it ain’t what it used to be...

Taking this a bit further, if nothing is priced at €15,000 it follows that something’s price should be higher. A cup of coffee for $1,000,000? A dozen eggs for a barrow-full? Why not, it’s not like we haven’t seen it before,.  But, hey, let’s keep printing it can’t happen here, right?


One Dozen Eggs, And Keep The Change -PLEASE!

We have become so accustomed to cheap money that the very oxymoron “cheap money” no longer rings alarm bells. Zero interest rates? No problem. Negative interest rates? No problem. Seriously??? Money should not be “cheap”, it should not be free (as in pouring down on everyone) and it most definitely should not have an absolute negative “carry” (as in negative interest rates).  Otherwise.. why should we even possess it, hold it, amass it? 

Get this straight: when (mind you, not if) someone comes up with the realistic reserve currency alternative, the dollar is history, and most likely so is the euro.  And by realistic I definitely do not mean cryptos, NFTs, imaginary art or even precious metals.  I mean the Chinese yuan, which is very carefully and deliberately being prepared to dethrone the dollar.

I don’t know when China will pull the trigger - but pull it will. Pay careful attention to what China is doing. It is banning cryptos, tightening credit conditions, warning of asset bubbles. Contrast that with the Fed and, sadly, the ECB.  China is preparing the yuan as reserve currency of choice; it already has ready customers fit it, since its trade surplus is gargantuan. All it has to do is make the yuan freely tradeable and require payment in yuan for its exports.  It’s going to happen...

Meanwhile, back in Rome - sorry, I meant Washington - politicians are bathing in hubris, never for a moment worrying about a sudden collapse. Hint: ask Gorbachev what he thinks...


Thursday, June 3, 2021

Unprecedented Money Creation - What Is The Impact?

 I am a great fan of behavioral, as opposed to “classical” economics. Richard Thaler’s Misbehaving (2015) is one of the few economic theory books that I truly enjoy reading. The author went on to win the Nobel Prize in 2017, so he’s no slouch. 

In a nutshell, the main premise of behavioral economics is that people make decisions based mostly on fast, emotional reactions (gut feelings) instead of rational analysis. Importantly, this premise has been tested and proven on the field in hundreds of experiments - unlike “classical” economics which is mostly based on theoretical econometric models.

Thus, we are in fact not homo economicus.  Despite thisalmost every economic theory in the world is based on a strict human “rationality” that just isn’t there.

So... will the current unprecedented monetary flood taking place in the US, EU and UK affect economic behavior? And if so, how?  It’s important because these economies combined account for about 40% of global GDP. Furthermore, how will this behavior affect China, which accounts for another 20%?

First, let’s look at the size of new money creation. I’m using the US as a proxy because of its global economic power and because the dollar is (still) the undisputed reserve currency of choice.

Within just one year the US has exploded money creation (M3) from a bit under $1 trillion per year to $4 trillion (chart below). The Treasury/Fed has “printed” more dollars in one year than the previous six years combined. This shock to the system is surely altering people’s behavior - but, how?


US Dollar Money Creation Explodes Upwards

For one, direct payments to all Americans (helicopter money) is causing a labor shortage, mostly at the low end of the income scale.  Even though this heli money was definitely a one off, people are behaving as if it will go on forever.  Those who “rationally” need jobs and income the most are being offered jobs, but choose to remain unemployed. 

Another effect is the immense popularity of extreme speculation.  Millions who got heli checks are not using the money for insurance against uncertain times but for wild bets on meme stocks and dodgy cryptos, despite acknowledging that their actions are highly irrational.  

The Fed/ECB/BOE themselves acknowledge that such enormous money creation leads to higher inflation (and CPI/PCI are already spiking up), but choose to continue pumping more money into a flooded system.  How rational is that? (Unless, of course, their ultimate  goal is to create high inflation..).

Put those three observations together... those of us who know market history understand that markets can exhibit irrationality, particularly at their manic, delusional stages.  Even Adam Smith understood “animal spirits”. But, right now, this irrational misbehavior is extending to the entire economy. From workers choosing to remain unemployed to central bankers refusing to perform their monetary policy duty,  this irrational behavior is gripping the entire economy.  

This situation looks to me like a train going downhill at breakneck speed towards a dangerous bend in the tracks.  Its passengers are flushed with the thrill while the engineers are stoking on, never mind the brakes..

We have gone way beyond Mr. Greenspan’s partial irrational exuberance, we are now in total Misbehavior Economics territory..


Wednesday, June 2, 2021

It’s All Funny Money

In the last 18 months the US has boosted its money supply (M3) by a whopping $4.5 trillion.  Any way  you look at it, this is a historically unprecedented event, both in size and speed. Including WWII.



Biggest Monetary Creation In US History

Where did all this money come from? Simple: it was almost entirely printed by the Fed, which during the same time has ballooned its balance sheet by $4 trillion.


Biggest Fed Balance Sheet Balloon In US History

What will ensue? If the above was undertaken by, say,Venezuela or Argentina the IMF would be screaming and yelling, and markets would have reduced their national currencies into TP. The US being an Empire, it gets the benefit of the doubt: “oh, they must know what they’re doing, they have a new economic/monetary theory to deal with this” ( known as MMT - modern monetary theory).  Biden is all in on this, by the way, and is calling for even more money to be printed.

(Aside: this is all so much butter on the toast of crypto scammers worldwide.  They have even learned Latin: fiat - not the car, eh?).

What’s the catch? The decline and fall of the Roman Empire took roughly 1,100 years and was obvious for at least three centuries before Constantinople fell to the Ottomans. The Ottoman Empire, in turn, fell around 400 years after its peak. The British and Spanish Empires took 200 years to succumb.  Finally, the Soviet Empire collapsed almost overnight, in less than 20 years after Afghanistan and Chernobyl. See the pattern?

America’s strength is based on a rock solid dollar as the undisputed storehouse of value worldwide.  It is now very rapidly being turned into funny money. If the Treasury and Fed continue printing without care, America’s collapse could end up being measured in months...


Saturday, May 29, 2021

What Now, Fed?

 When looking at inflation, the Fed doesn’t much like the mainstream CPI statistics; instead, it prefers the Personal Consumption Expenditures index (PCE).  April’s numbers just came out yesterday, see below. It’s the highest monthly reading in ten years.


PCE Inflation Running Super Hot

The Fed keeps on claiming that this is temporary and will go away soon.  Further, it says it’s all due to “supply chain disruptions” due to COVID.  Really??? How the heck are soybeans impacted, or lumber, or iron ore (China is importing the stuff heavily once again, even at record prices). There is no supply disruption, obviously.  It’s just that those many, many more dollars it created are chasing a finite supply of “stuff”. It’s as simple as that...


Iron Ore Prices At All Time Highs

The cost of shipping all this very expensive iron ore to China is also going through the roof - Capesize charter rates have doubled.

Do the math: the cost of iron ore landed in a Chinese port today is almost three times what it was in early 2020. Prices for all basic commodities show the exact same pattern - or worse.  As these higher costs make their way through the production process consumer prices will certainly start rising faster in months to come.

What will the Fed do then?